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Beginning on August 1st, a new underwriting rule goes into effect to halt the "buy-and-bail". 

Fannie and Freddie underwriting guidelines will require that borrowers applying for a mortgage to purchase a property, and who already own another, must verify that they have at least 30% equity in the old property - or they can't get a loan.

Countrywide has already instituted the new guideline, and is also applying it towards FHA applicants as well.  This came into play on the Arthur deal, and as a result, we don't have a winner yet - but stay tuned, tomorrow is the day!  In an interesting twist, Countrywide is applying the rule towards FHA loans, and Bank of America is not - at least, not yet.

The new listing on Arthur has been on the MLS for about 24 hours, and it's a little slow out of the gate - there have been about 25 calls, and three offers submitted, the highest at $180,000 with a $7,000 credit to buyer from seller (net $173,000).  Two offerees state that they are owmer-occupants, one an investor.

It's going to run at least until Monday, so we'll see if momentum picks up over the weekend.

Historically the best offers come in within the first four days - it takes a day or two for buyers to find time to visit a new listing, and then sleep on it, and then write an offer.  Ideally, sellers who have more than one offer should grab the best one on the fourth day and put it to rest - it's not likely to get better if you hold out longer.

In the meantime, some random thoughts:

1.  An agent this week said she has had two short sales in process at Countrywide for FIVE months, and no response yet.

2. Another agent who lists REOs from Fannie Mae, IndyMac, and others but not Countrywide, said she had 18 listings sent to her last month, but only 3 this month so far.

3. New pendings have continued this month, but the resulting closed sales will likely be around last year's total, or less.  Here are the pendings between July 1-16, those in 2002-2007 have already closed:

2002 - 1,203

2003 - 1,517

2004 - 1,339

2005 - 1,326

2006 - 999

2007 - 815

2008 - 1,108 

Of this year's 1,108, only 22 have closed already, and virtually all of the remaining are still within their 17-day inspection period.  If 30% of those fall-out of escrow, the final closings will be less than last year during the same period.

4.  Our long-time tenant moved out of the one rental property I own because of the price of gas.  We ran two ads on Craigslist, one the first weekend of July and one last weekend, and have had at least 100 phone calls and a dozen applications.  The rental market appears to be alive.  There have been a handful of interested parties who have walked from their mortgage, or are doing short sales, but with all the other action I noticed that I wasn't too interested in their stories.  I committed to two different applicants, but both flaked after a few days, the first because her escrow fell-out that she was sure was solid (she signed the rental contract and gave me the deposit).  The others disappeared.

5.  The biggest concern I have for the overall market is how ignorant the listing agents are to the current market conditions.  If you are making an offer on a non-REO house, not only are the sellers dug in, so are the listing agents.  They think their job is to protect their sellers from lowballing thieves.  In the meantime, they aren't selling, and the market is slipping further away, squashing any chance they might have had.  For those who don't need to move, no problem.  But I feel for those who do, and the agent is getting in the way.  I spoke with some sellers off the record who said they wanted to lower their price, and the agent refused - saying that somebody will come along someday.  If you are selling, don't let your agent get in the way of you lowering your price!

An old photo from Arthur - it used to have a roof ornament!

The events of the last few days have been discouraging for those hoping for free-market forces to return some sanity to the environment.

What else can we expect?

Let's review some possible future events, and likely answers from the powers that be:

1.  More investment bankers fail (Lehman, etc.) - Fed opens the discount window.

2.  More banks fail, and FDIC runs out of money - Fed opens the discount window.

3.  More people stop paying on their mortgage - FDIC suspends foreclosures (like they've done at IndyMac)

4.  Need more stock support - send in the PPT.  Here's a link to EN for yesterday's example: http://exurbannation.blogspot.com/2008/07/no-ppt-nosiree.html#comments

5.  Homeowners are underwater - force loan cramdowns on banks (Frank-Dud Bill).

6.  Fannie/Freddie needs more bailout - "re-structure".

7.  Mortgage credit tightening - push FHA/VA loans.

8.  Neg-am resets - lift the reset caps to 125%, or waive them altogether. 

I'd prefer to get this over with - but rather than having a swift, timely return to sanity in the real estate market, their actions are leading to a long and dreary fiasco that they hope will work itself out.

If the government is going to provide a continuous backstop for real estate, you might as well buy a house.  If it doesn't work out, they'll be around to save you.

For most people it is better to wait this out until there is more certainty, and lower prices, before buying. 

But for those willing to consider buying now, here are some tips to consider to help hedge your bet:

A.  Buy in older areas where there should be less funny money.  The more exotic mortgages in an area, the more likely to be foreclosures in the future.

B.  Buy a one-story house - baby boomers are inreasing the demand.

C.  Buy in neighborhoods where the inventory has been low the last couple of years.  It's not a guarantee of future performance, but a decent indicator of the current homeowners' comfort level.

D.  Buy newer homes with no HOA or Mello-Roos.  The future suppy and demand for these will be better than either older homes, or newer homes loaded with fees.

E.  Make lowball offers - if it doesn't make you cringe, it's not low enough.

F.  Look off the beaten path.  Dig out deals that aren't on the open market.

G.  Look for superior homes with all the extras.  Having the upgrades you want already saves out-of-pocket expenses, and hassle, of doing them yourself.

H.  Where possible, utilize seller financing.  If the home's value drops dramatically, you'll have more power re-negotiating the terms with the seller, than a bank - and your payment history won't be on your credit report.  If that sounds kind of ruthless, well, I guess it is, but hey - it's the wild, wild west now.

But Jim, you're a realtor, isn't this self-serving?

It's in bold print above that most should wait it out, because the overall "market" will see more declining data for a long time to come - wait until you feel comfortable with the risk.  In the meantime, there will be segments of the marketplace, and/or individual neighborhoods that survive.  For those folks who can stomach the rath, get good help and take a look around.  Buy only if you find a compelling, top-quality property at a very attractive price.

Here are the number of sales and average-cost-per-sf of homes over 2,000 sf in 92130. Will prices revert back to 2003? 2002? further?

Carmel Valley (92130) Detached Homes Over 2,000 sf

The 2008 is year-to-date. The change between 2003 and 2004 is interesting - a 24% decrease in sales while the average $-per-sf went up 25%, about the same time that lenders started pushing the neg-am loans.

Do you think if CV pricing went back to averaging $281/sf, it would be the 'bottom', or is the lack of financing going to cause more overshoot? Good financing is available today if you have a big down payment. I confirmed this week a rate of 6.625% for a 30-year fixed up to $1,500,000 - with a minimum 30% down payment.

Here is the list of upgrades with costs on one of six houses currently for sale at Derby Hill, with approximately 16 other homes to be released in the last two phases before closing out the tract. 

It was mentioned yesterday that pricing peaked in 92130 in 2006 or so.  Here are the sales prices of the same 3,505 sf plan when new - Pardee hasn't budged much:

5323 Foxhound  $1,154,000    5/06

10734 Cherry Hill   $1,259,500   10/06

11384 Mustang Ridge   $1,269,500   11/06

5290 Foxhound   $1,103,000   12/06

11400 Arabian Crest   $1,211,500  5/07

5274 Birch Hill  $1,292,500  1/08

10791 Heather Ridge  $1,299,000  3/08

5249 Amber View  $1,596,500   6/08

The last three look like premium canyon-view lots on the map.

There is one NOD filed in Derby Hill currently, on a property that was 96% financed when purchased in 2005.  If that one or any others end up being bank-owned, once listed for sale as an REO I'd imagine they would fly off the market - the remaining 160 people on the builders' waiting list would jump at a chance to get a 'bank deal' in Derby Hill.